Another year, another attempt to fix our retirement laws. As I write this, the SECURE Act (Setting Every Community Up for Retirement Enhancement) is working its way through the Senate with bi-partisan support. By the time you see this blog (I write them a few weeks in advance), this could be law.
Here are the main changes and my quick (and subject to change!) opinion of what it means to you.
Required Minimum Distributions are moved to age 72 (previously age 70 ½).
Okay, having the RMDs start on a birthday instead of a half-birthday is certainly easier to remember and understand. However, most retirees in this country have to take out more than the required minimum well before their 70s just to pay the bills. So, this is a nice break for the wealthy retirees, but not a game-changer for most.
You can continue to make tax-deductible contributions to your IRA until age 72.
Since 63% of Americans retire between the ages of 57 and 66*, this provision won’t help a ton of people. Only 4% of current retirees were able to wait until age 70 to retire. Many of those who are working past 70 are spending their earnings rather than saving. So, the slice of the American saver that this new provision helps is very small.
Stretch IRAs will be shortened to 10 years at most.
Currently, if you pass a tax-deferred account (401(k), 403(b), 457, traditional Individual Retirement Account) to anyone other than your spouse, that person has to take the money out of the account within 5 years or choose to receive annual payments from the account over the course of their lifetime. Under the SECURE Act, the lifetime option would be shortened to 10 years.
As a retiree, you may shift your withdrawal strategy to taking more out of tax-deferred accounts to avoid leaving that money to non-spouse heirs. Chances are, your kids will be in the middle of successful careers at the time of your death. Forcing IRA distributions over the course of 10 years will potentially knock those kids into a higher tax bracket, giving the government a higher share of your retirement money than if you had spent it yourself.
Employers can now offer fixed annuities as a 401(k) option.
As with all things in retirement law, just because a rule gets passed, doesn’t mean it is implemented right away. For example, only 52% of employers offer a Roth provision in their 401(k) plans, even though the law that allowed it was passed in 2006.
Essentially, the new law allows employees to be able to create a pension out of all or part of their 401(k). However, they could have done that before by rolling the 401(k) money to an IRA and purchasing a fixed income annuity with all or part of the account. So, as a practical matter, this isn’t as life changing as politicians might make it sound.
You can use up to $10,000 of 529 account money to pay off student loans.
This is a good start, but why not make it 100% of 529 money? After all, 529s were created to help fund college. What difference does it make if you pay in the year or the years after the cost was incurred? Hopefully this will be the start of more flexibility in using 529 money to help families with student debt.
Stay tuned, I’m sure I’ll be writing about this more as the law is passed and rules of implementation start rolling out.